October 30, 2017

Income Strategy Update for Week Ended 10/27/17

Greenhill Advances on Preliminary Tender Offer Results While Arlington Asset, Washington Prime, and BGC Partners Fall on Earnings

Last week, the Income Strategy declined -1.26%, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s -0.13% fall and the S&P 500’s 0.23% advance (Exhibit 1). The strategy ended the week up 15.94% YTD, or 856 basis points ahead of the high yield index and 122 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 10/27/171

Time Period Income Strategy ML HY II S&P 500
Last Week (10/20 – 10/27) -1.26% -0.13% 0.23%
MTD 0.82% 0.32% 2.55%
QTD 0.82% 0.32% 2.55%
YTD 15.94% 7.38% 17.16%
Inception (annualized since 4/2/2009) 15.58% 12.43% 16.39%

Source: Bloomberg, Miller Value Partners

Four equities and a preferred comprised last week’s top five contributors (Exhibit 2). Investment bank Greenhill & Co (GHL) advanced after announcing preliminary results of their tender offer where 3.51m shares were tendered, or roughly 12% of shares outstanding, for a total of $60.5M. The weak tender results suggest that a higher proportion of investors want to own the stock than anticipated, and Greenhill is likely to now be an active purchaser of its own shares on the open market. Preferred shares of William Lyon Homes (WLH) gained after UBS came out with a bullish note on the sector, stating the group is benefiting from tight supply-demand and should see more improvement in mortgage availability. In addition, Zelman upgraded WLH to “Buy” from “Neutral” saying upside is likely and valuation attractive. Mortgage REIT New Residential Investment Corp (NRZ) gained after reporting Q3 EPS of $0.64, surpassing estimates of $0.54 and the dividend of $0.50 (11.5% indicated yield). The beat was driven by significantly higher than expected net interest income of $272.44M versus consensus of $92.95M and lower than expected operating expenses. Tangible book value also rose 3.26% to $14.87. There was no price-changing news on Abercrombie & Fitch (ANF).

Exhibit 2: Significant Contributors to Performance, 10/20/17 – 10/27/17

Name Type Return
Greenhill & Co Equity 10.6%
William Lyon Homes 6.5% Preferred 3.0%
Abercrombie & Fitch Co Equity 3.6%
New Residential Investment Corp Equity 2.3%
*Recently Added Security* Equity 3.6%

Source: Miller Value Partners

Five equities comprised last week’s top five detractors (Exhibit 3). Carlyle Group (CG) announced that founders David Rubenstein and Bill Conway are stepping aside as Co-CEOs and have named Glenn Youngkin and Kewsong Lee as their replacements effective January 1st. Rubenstein and Conway will become co-executive chairmen and will remain actively engaged in the company moving forward. Mortgage finance firm Arlington Asset Investment (AI) fell after reporting Q3 EPS of $0.52, falling short of analyst estimates of $0.57 and the $0.55 dividend (19.0% yield). Management attributed the miss to higher-than-expected mortgage prepayments and lag effects tied to the rate hike, though they also noted that the outlook for both is much better this quarter. Tangible book value increased 2.7% to $12.88. Washington Prime Group (WPG) declined after reporting Q3 AFFO of $0.37, just missing consensus of $0.39, but easily covering the $0.25 dividend (12.8% yield) The company guided FY AFFO of $1.63-$1.67, down two pennies from the midpoint of their previous guidance. BGC Partners (BGCP) reported Q3 distributable income per share of $0.29, in-line with estimates, while revenues of $827M exceeded the $815M consensus estimate. The company guided 4Q revenues of $800M-$850M, below estimates of $865.5M. Chimera Investment Corp (CIM) fell below closely watched technical levels.

Exhibit 3: Significant Detractors from Performance, 10/20/17 – 10/27/17

Name Type Return
Carlyle Group LP Equity -8.0%
Arlington Asset Investment Corp Equity -7.4%
Washington Prime Group Inc Equity -7.1%
BGC Partners Equity -5.0%
Chimera Investment Corp Equity -3.3%

Source: Miller Value Partners

Did you know that we write this piece for Opportunity Equity as well? Check it out.

1The performance figures reflect the deduction of a model investment management fee of 1% (the highest fee for separate accounts under our fee schedule) and certain other expenses. For important additional information about Income Strategy performance, please click on the Income Strategy Composite Performance Disclosure. The performance returns shown in this report are preliminary and are subject to revision. Past performance is no guarantee of future results.

Significant Contributors and Significant Detractors are the Strategy holdings that had the greatest effect on Strategy performance for the week. Holdings that have been in the Strategy since the end of the most recent calendar quarter are identified by name. For information on how Contributor/Detractor data were calculated and a list showing the contribution to the Strategy’s weekly performance of each investment held at such quarter end, contact us.

Any views expressed are subject to change at any time, and Miller Value Partners disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results, and there is no guarantee dividends will be paid or continued.

©2017 Miller Value Partners, LLC

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